Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Thursday, August 11, 2011

The Keynesian game: Let's pretend we are rich even though it is just an inflation mirage

At the heart of the recent Paul Krugman screeds has been this belief: In a recession, we must spend money as though we were wealthy. How do we do that? As Krugman has said many times, the government debases the currency or borrows with a vengeance.

Krugman's other "solution" is to confiscate more wealth from businesses and individuals and then pretend that the transfer itself makes everyone wealthier. The interesting thing to me is that this process -- debasing money -- actually makes people poorer as their money buys less than before.

However, when we are in Keynesianland, none of this matters. Inflation increases and it puts more money into the hands of people who then spend it, and somehow this magically lifts an economy from depression. As Krugman recently wrote:

Actually, there’s a very good case for allowing inflation to rise above 3 percent, to 4 or even 6 percent, for several years. Don’t take it from me — take it from Greg Mankiw and Ken Rogoff. Indeed, it’s arguable that inflation, both actual and expected, is the main thing the Fed should deliver, if it can.

Of course, the idea that the Fed has the ability to "manage" inflation is something for the debate mill. My belief is that it does not take long for inflation to jump from six percent to double-digits and beyond.

Underlying this nonsense is the belief that money itself is wealth, and that the government creates it out of thin air. Thus, the government pulls yet another financial rabbit out of the hat. Through central bank manipulation, the government can borrow at a zero (or even negative, in real terms) interest rate, which then becomes "proof" of "free money." In other words, the government can spend money as though the economy were robust instead of being just bust.

In the end, the results are yet another Keynesian mirage. Spend as though you were rich, as though the spending itself will turn around the economy and really make us rich. Maybe in the fantasyland of the Progressives, but not in the real world.

And, as the economy continues to tank, Krugman can blame the Wall Street Journal editorial writers, the Tea Party, and everyone else, but never his own ideas that put this spending spree into motion. No, if the economy tanks, it must be because those in power didn't spend enough and debase the currency enough because, after all, Paul Krugman never is wrong.

13 comments:

Anonymous
said...

Over the last few years, the dollar has rallied, rates are at all time lows, massive tax cuts have been passed are near all time lows, and yet you continue to jump up and down about all the 'confiscate more wealth from businesses and individuals' that is going on.

"The interesting thing to me is that this process -- debasing money -- actually makes people poorer as their money buys less than before."

Not if their real wages are rising over and above the inflation rate, and in line with productivity growth, just as happened in the Classic era of Keynesianism, where there were rapid and very significant raises in real wages and living standards. Too bad you're ignorant of history.

"However, when we are in Keynesianland, none of this matters. Inflation increases and it puts more money into the hands of people who then spend it, and somehow this magically lifts an economy from depression."

No "magic" is involved, Andersen. The process was understood even by your fellow Austrian Ludwig Lachmann:

"Policies based on Keynesian macro-economic recipes might have succeeded (had they then been tried) in 1932 and did succeed in 1940 because it so happened that at the bottom of the Great Depression as well as during the Second World War all sectors of the economy were equally affected. In 1932 any kind of additional spending on whatever kind of goods would have had a favourable effect on incomes because there was unemployment everywhere, as well as idle capital equipment and surplus stocks of raw materials."

Lachmann, L. M. 1973. Macro-economic Thinking and the Market Economy: An Essay on the Neglect of the Micro-Foundations and its Consequences, Institute of Economic Affairs. p. 50.

All that money dilution can conceivably accomplish is to steal purchasing power from those holding the existing money and give it to those getting the new money. It's nothing but fraud and theft. When one finds an example of unemployment it is invariably caused by statist schemes such as wars, controls, theft and funny money gyrations.

Free people do not have an unemployment problem. The claim that they do is a phony anecdotal narrative and is THE BIG KEYNESIAN LIE.

You forgot some details, LK. First, US had a wonderful, competitive industry back then. Maybe, just maybe, the massive spending spree that started after WWI and WWII do have something to do with the fact that US is basically broken and non-competitive if compared to the 40's, for example.

You know, in the real, non-Keynesian world, you can't spend more than you earn for decades without consequences. Europeans are starting to learn this lesson as well: welfare state costs something, and if it costs more than the country can afford, it's unsustainable in the long run.

The Keynesian answer: "Well, all I really know is that, In the long run, we're all dead". Basically: "Let suckers pay the bill in a couple of decades".

"All that money dilution can conceivably accomplish is to steal purchasing power from those holding the existing money and give it to those getting the new money."

When money is borrowed by the state, and its deficits are matched by $for$ bond issues you don't have new money creation, so this argument falls flat on its face.

As the "money dilution" - the creation of fiduciary media and possible inflationary processes that come from vigorous economic activity - it is real world capitalism and capitalists that invented this and accepted it, via fractional reserve banking, to meet the demand for money arising from expanding trade, commerce and investment.

"You know, in the real, non-Keynesian world, you can't spend more than you earn for decades without consequences. "

LOL.. the government debt to GDP ratios plummeted all over the world from 1945-1973 and right down to the election of Reagan in the US.

In these years when countercyclical Keynesian fiscal policy was employed as the norm, the government debt shrunk to a small percentage of the value of national output. You haven't foggiest idea what you're talking about.

The world was going from the lifestyle of 1900 to 1970 in any event thanks to the free market. Statist central banking and fiat money-financed slaughterfests and depressions slowed things down considerably. Further, after WWII, we still had a semblance of a gold exchange system which would hold down insane levels of money dilution.

After WWII, all of the trends that that been held down for so long by the statist wars and depressions came bursting forth. But progress was once again slowed down by more wars and more Keynesian insanity in the 1970s.

LOL.. the government debt to GDP ratios plummeted all over the world from 1945-1973 and right down to the election of Reagan in the US.

Oh, you mean the Bretton-Woods craziness, when the US could just print money like there was no tomorrow and pretend everything was fine? Maybe, just maybe, the money-printing spree and the undervalued dollar in 45 helped US not care much about spending. The US government still did spend more than it earned, they just printed the difference and promised the money was still gold-backed. When the inflated money supply was too much to handle, then, suddenly, the gold window was no more. The US deficit as % of GDP really started exploding. But, to be fair, that's was a big fail for monetarists, not Keynesians.

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).